ANZ, CBA, AMP accelerate ‘simplification’ amid Hayne fallout

The fallout from the banking royal commission is forcing three giants of the financial services sector, ANZ, Commonwealth Bank and AMP, to accelerate simplification of their business models, including offloading non-core badets which they insist is necessary to prepare for a much tougher operating environment.

ANZ reported its worst full-year profit in eight years on Wednesday, dragged down by customer compensation costs, but investors applauded CEO Shayne Elliott’s program to simplify the bank, including a retreat from Asia and dramatic cost-cutting, even though trading conditions in retail banking are more challenging.

“Given the environment, we don’t think this is the time to push the boundaries,” Mr Elliott told banking badysts after announcing ANZ’s full-year cash profit was down by 5 per cent to $6.5 billion.

“It’s the time to retool, and reset for the long-term,” he said.

Commonwealth Bank and AMP are also preparing for the longer-term by slimming down, as the outlook for the badet management and life insurance industries looks more uncertain and as complexity is increasingly seen by boards of directors as an operational risk.

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CBA chief executive Matt Comyn said the sale of its global badet management arm to Mitsubishi UFJ Financial Group for $4.1 billion “represents another important milestone in CBA’s strategy to focus on its core banking businesses and to create a simpler, better bank”.

CBA remains committed to spinning-off Colonial First State, and its financial planning and mortgage broking brands, which came under fire at the royal commission.

AMP’s acting CEO Mike Wilkins was also explaining the wealth manager’s simplification plans, which include the $3.3 billion sale of its life insurance arm to UK-based Resolution Life. This was attacked by a group of fund managers for destroying shareholder value.

Mr Wilkins argued the sale is necessary given structural changes within the life insurance market, which he said are permanent and not to be underestimated. He said the changes will result in a simpler, more agile business better positioned to compete in core markets.

The share prices of ANZ, CBA and AMP all rose on Wednesday.

CBA and AMP are following the lead of ANZ, which began its simplification program three years ago.

During that time, it has sold 21 businesses and reduced its institutional banking loans by $12 billion. National Australia Bank – which will report its full year profit on Thursday – is also part-way through its own transformation program.

“Simplification has now become the most commonly used word in Australian banking,” Mr Elliott said. “However, I wouldn’t want to be starting just now. In three years, we have changed more in any time since the 1951 merger that created ANZ.”

“Unfocused scale and complexity is the enemy of good performance, for shareholders and our customers.”

Mr Elliott insists the strategy will hold ANZ in good stead as it tackles some of the most challenging conditions retail banking has seen in decades. Home loan growth had slowed, investor lending has stalled, borrowing capacity had been reduced and competition has increased, he said.

“We have had 30 years where home lending has grown mostly at double-digit every year, and more recently 5 to 6 per cent. That’s an extraordinary market growth over a period of time and we have all become used to it. But we don’t think that is sustainable. We think that will be much more subdued.”

House prices falling

House prices in Sydney and Melbourne have further to fall as banks continue to limit the amount of credit available for mortgages to meet tougher regulatory requirements, Mr Elliott said.

Sydney property prices are falling at the fastest rate in nine years, down 7.6 per cent in the past 12 months year according to Corelogic. Mortgage insurer Genworth said this partly explained an almost 50 per cent fall in its profits for the third quarter.

Mortgage credit growth would probably halve, to 2 to 3 per cent, in the coming years, Mr Elliott said, and credit growth from investor borrowers has already “ground to a halt”.

“I wouldn’t be surprised if it [the house price correction] had further to run … I wouldn’t be surprised if it continued a bit longer.”

Investors in the banking sector are growing nervous about the potential for additional regulation to be loaded onto the sector in the wake of the royal commission.

“All of the banks have been coerced into much stricter lending criteria and we just need to be careful that, in conjunction with a cooling off in the housing market, that does not accentuate the downturn,” said Romano Sala Tenna, a portfolio manager from Katana Asset Management.

“It’s a healthy part of the cycle for some heat to come out of those markets, but we don’t want to see that become disorderly. And it has the potential to become disorderly if we over-regulate what the banks are doing because of some poor practices on the wealth management side.”

As the banks focus on Australian retail and business banking, the policies introduced in response to the royal commission will have an even greater impact on the sector.

Mr Elliott downplayed risks identified in reports by investment bank UBS, which highlighted the potential for tighter lending restrictions caused by the banks move away from using the “Household Expenditure Measure” or HEM index to estimate borrower expenses.

Not using HEM means “the process will become a little but slower” because borrowers will need more documents to support loan applications, Mr Elliott said.

“I don’t believe for the vast, vast, vast bulk of the market it really will have any impact on borrowing capacity. It will just slow things down in the short term.”

However, the cumulative impact of macroprudential policies – including caps on growth to investors and reduction in loans made on low deposits – along with banks’ own conservatism had made it tougher for customers to borrow, which was one of the reasons house prices are falling he said.

The average household average on income of $110,000 three years ago could have borrowed $550,000 for a mortgage but “that same family today with exactly the same income – $110,000 – today could probably only borrow about $440,000,” Mr Elliott said.

“The reason for that is the myriad of changes banks and regulators have made around borrowing capacity. That has reduced the amount of money people have to buy homes, and that is part of the reason house prices have fallen.”

“Will they continue to fall? I don’t know. [But] I don’t think borrowing capacity is going to go up any time soon.”

ANZ doesn’t see any issues in the economy creating an immediate concern that house prices are in for a harder fall.

“The real challenges – that are much more difficult to predict – are the market environment around competition, and any further changes as a result of the royal commission. Those will have more impact than how the economy is operating,” Mr Elliott said.